Softer, Gentler ActivismFar from Icahn's dog-on-a-bone approach, Firebrand's Scott Galloway believes you catch more bees with honey when pushing companies to change. In his first letter to the Times' Chair, Arthur Sulzberger Jr., and CEO Janet Robinson, Galloway said: "There is nothing wrong with the New York Times Company that cannot be fixed with what is right with the New York Times." As a recent Portfolio profile of Galloway described, he learned about activism after being tossed off the board of a company he founded, RedEnvelope ( REDE). After a failed attempt to get back on the board a year later via a negative proxy battle, he took a conciliatory approach the following year and was successful. He's kept smiling as an activist ever since, using this approach at the Sharper Image ( SHRPQ), Harvey Electronics ( HRVE) and Gateway Computer (with mixed success). In this contest, although Harbinger and Firebrand urged the Times to sell off non-core assets such as its stake in the Boston Red Sox and work harder at making a success of their digital media efforts, they respected the families' desire to retain the current share structure. Such politeness leading to success is at odds with the Conference Board's recent study on activism, which declared that hostile activists were typically 25% more successful in achieving their aims than non-hostile activists. However, Harbinger and Firebrand didn't succeed because they spoke in soothing tones to Arthur Sulzberger Jr. (although I'm sure it helped). Here are five reasons Harbinger/Firebrand succeeded where Morgan Stanley failed:
- They spoke softly and carried a big stick: a 20% stake in the Times. This was three times the size of Elmasry's stake. It would have been more difficult for Sulzberger Jr. to argue they were a small minority (read: crackpot) shareholder voice.
- The Times stock surged in the weeks following disclosure of the Harbinger/Firebrand stake. From Jan. 25, when their stake was made public, to today, the Times' stock price is up 35%. The market was voting with these activists before it could come to a vote at the annual meeting, and the board knew it.
- Fool me once, shame on you; fool me twice, shame on me. No activist gets a free ride when making its case in a proxy battle or withhold vote. Sometimes, as happened last year when Carl Icahn failed to get elected to the Motorola (MOT) board, shareholders give management the benefit of the doubt. Yet management better perform. Motorola didn't this past year (which is why Icahn's in the driver's seat to get his four nominees elected at this year's meeting) and neither had the Times, until these latest activists emerged. Again, the Times' board could have read the writing on the wall and decided a negotiated settlement with the activist funds, conceding two board seats, was better than the risk of them getting all four elected.
- A more difficult argument to refute this time around. Last year, shareholders were asked by Elmasry to support removing the dual-class structure. The Times pointed to how nearly all successful media companies had it. This time, the activists were essentially arguing for the company to sell its noncore assets. How could the Times run a campaign saying, "No, we strategically need to hold our stake in the Red Sox to more successfully compete in our market and defend our journalistic integrity"?
- Outside activist hedge funds are better able to lead an activist campaign than insider institutional managers with conflicting ties. Elmasry was leading the charge against the Times as a Morgan Stanley employee. Despite tacit support from the investment bank, it was clear that not all of his fellow employees were happy. The Times exploited this weakness when the Sulzberger-Ochs family decided to pull its assets under management from the custody of Morgan Stanley. Outside activist hedge funds face no conflicts of interest like this typically and can therefore speak with a stronger voice. Elmasry would have been better off following Harbinger with his aims vs. leading the charge.